Americans get thrifty except for school debt

Updated 10:14 pm, Tuesday, May 14, 2013

Americans returned to their thrifty ways in the first quarter, except when it came to student loans as they added $20 billion in debt, the Federal Reserve Bank of New York said on Tuesday.

"After a temporary deceleration in the previous quarter, the data suggests that household deleveraging has resumed its previous trajectory," Wilbert van der Klaauw, senior vice president and economist at the NY Fed, said in the report.

According to the NY Fed, which covers southern Connecticut and northern New Jersey, Americans shed $110 billion of debt in the first quarter, with experts reporting a combination of refinancing, disciplined budgeting and bankruptcy helping to reduce borrowing levels that had gone up during the 2012 holiday season. National borrowing for new cars was also down and credit card balances fell by $19 billion.

At the end of the first three months of this year, total household debt stood at $11.23 trillion, the lowest level since the third quarter of 2006, when there was only $11.11 trillion.

Local experts see debt trends affecting job growth and potentially the future of a generation or two.

Americans are continuing to spend on education, with the average debt for college rising to $24,810, the report found. Plus, education is more expensive here.

Connecticut was one of 16 states with a higher student debt burden than the nation as a whole. Nutmeg households were better than other states in staying current on that debt, though overall delinquency remains in the double digits.

According to the Fed, 11.2 percent of student loans are 90 days or more late in America. Connecticut is one of 23 states with a rate of less than 11 percent.

Perna said economists are concerned about indebtedness because it can make economies fragile. But perhaps even more concerning is that rising costs for college and higher debt loads can discourage people from pursuing higher education.

Many studies have found that the more education a person achieves, the higher their paychecks.

Perna said student borrowing "is the single piece of bad news in the debt picture."

While delinquencies, bankruptcies and foreclosures were down from a year ago, the numbers remained high enough to account for some of the decline in overall indebtedness.

According to the report, there were 184,000 new foreclosures during the quarter, and 309,000 consumers declared bankruptcy.

There is a near-term impact on the economy from this thriftiness.

"It doesn't mean they're in a better position to go out and buy more stuff," Perna said, noting the trend, contributes to the sluggishness of the Connecticut economy. "I think they refinance so they can buy the things they can afford."

A financial adviser said debt remains a problem down the road, though people are making improvements.

Ronald Weiner, CEO of financial advisory RDM Financial Group in Westport, said his firm spends a lot of time on people's balance sheets and there is a lot of work to do when it comes to debt.

"What most people don't really want to see is what percentage they spend on everything," Weiner, an investment adviser for more than 37 years, said. "It's crucial people get a handle on expenses and where they can save."

Weiner said there are a number of trends that affect household financial stability, including longevity and support of adult children.

He said people are living longer and have to figure on 30 years of retirement and that can be difficult, especially if the next generation comes back home to live.

"A huge cost to middle-aged people that didn't exist a generation ago is they are still funding their children," he said.

And while the low interest environment is allowing people to cut mortgage and credit card expenses by getting lower rates, it hurts returns on traditional retirement investments, such as bonds.

Weiner said his firm works with people to open their eyes to what their current lifestyle means for their retirement and then tries to help them create a plan for the future, which includes frugality and creating an investment plan that makes sense for them.

And, he noted, his clientele are very capable and accomplished in general, but even they are facing challenges down the road in this economy.

Ultimately, Weiner said Americans need to prepare for the long haul and being disciplined about what you spend money on and paying down debt just make good sense; "Everybody needs a longer term plan," he said.